Saving for retirement may be the most important financial goal you’ll ever have. Why? It’s how you’ll need to pay for your up to 30+ years of unemployment (aka, retirement). Some people think they will rely solely on Social Security, but it was never meant to be the sole source of retirement income. As it currently stands if you have average earnings (say $50,000/yr), your Social Security retirement benefits will replace about 40 percent of that (roughly $22,000/yr). The percentage that Social Security replaces is lower for people in higher income brackets and a little higher for people with low incomes. Could you live on 40% of what you make now? And what if Social Security as we know it today is changed? It’s best to have additional money put away to supplement your income in retirement. That could include a pension (rare these days), savings, and/or investments. Your employer may or may not offer a retirement plan (usually a 401(k)), but there is an option that is available to anyone who has earned income – a traditional individual retirement account, or IRA. The advantages are similar to a 401(k): contributions can reduce your taxable income and lower what you owe in taxes and your investments grow tax-deferred leaving you with more in retirement compared to a standard brokerage account. Here is a high level summary of how it works:
|Who can contribute||You can contribute if you have earned income. If you file a joint return, you and your spouse can both contribute to your own separate IRAs, even if the spouse has no income (spousal IRA).|
|Are my contributions tax deductible?||If you (or your spouse) have a retirement plan at work and your income exceeds a certain level, your deduction may be limited or zero. If you (and your spouse) don’t have a retirement plan at work, you are eligible for the full deduction.|
|How much can I contribute?||For 2019 and 2020: $6,000. If you’re age 50 or older you can contribute $7,000.|
These amounts may be adjusted annually.
|What is the deadline to make a contribution?||Your tax return filing deadline (typically April 15th), not including extension.|
For example: You can make 2019 IRA contributions until 4/15/2020*, the date your 2019 taxes are due.
*Due to COVID-19, this deadline has been extended to July 15, 2020.
|When can I withdraw my money?||You can withdraw money at any time, however it may be subject to taxes and penalties, depending on your age and the reason for the withdrawal.|
|Am I required to take distributions?||You must start taking distributions by April 1 the year after you turn age 72 and by December 31 each year after that.|
|Are my withdrawals and distributions taxable?||Generally, yes. They will be taxed as income in the year they are withdrawn. The exception is any contributions you made that were not deductible. Since you already paid taxes on them they are not taxed again. In addition, if you are < 59.5 years old, you may have to pay a 10% penalty (exceptions apply).|
|Where can I open an IRA?||You can open an IRA at most banks, credit unions and other financial institutions. They are also available through online brokers, investment and mutual fund companies.|
For more details on income limits, the full rules and exceptions, check out the IRS website.